March 2009 Bulgaria with Its High Economic Dynamism and Financial Stability Is in a Good Position to Counter the Global Crisis

Bulgaria with its high economic dynamism and financial stability is in a good position to counter the global crisis. Over the past seven years it succeeded in registering high growth rates, in attracting foreign investors and capital and in bringing down unemployment. Thanks to a prudent fiscal policy, it managed to build solid reserves and even to generate budget surpluses in recent years. The Currency Board has been and will remain the guarantor of stability.

In the last quarter of 2008, though, the repercussions of the global financial and economic crisis could clearly be felt in Bulgaria too. It is to be expected that under its impact Bulgaria’s economic growth will slow down considerably.

Bulgaria does not face the risk of a collapse in its banking sector and tremors in the national economy can be cushioned with additional economic programmes, while social disruptions can be minimized through adequate labour market policies. The crisis will lead to an overdue cleansing and market consolidation, especially in the real estate sector.

The global crisis may lead to a new boom in Bulgaria’s “corruption economy”. With investments going down and the money flow from abroad deplet- ing, public expenditure and public tenders will grow as a counter-measure, thus increasing the “corruption pressure” in the institutions involved.

The extent to which the global financial and economic crisis will impact in Bulgaria will also determine how substantially this might affect social and political parameters.

March 2009 Bulgaria and the Global Crisis 1

Contents

1. The Pre-Crisis Situation: Stable Macro-Economy and Dynamic Development...... 2 2. No Crisis in the Financial Sector...... 3 3. The Currency Board as a Factor of Stability...... 4 4. A Weakening Real Economy...... 4 5. Slight Fluctuations on the Labour Market...... 5 6. Bulgaria in International Comparison...... 6 7. The Economic Programme of Government...... 7 8. The Neo-Liberal Mantra...... 8 9. Crisis and Corruption: Mutually Amplifying Scourges...... 9 10. Crisis and Elections: Fertile Soil for Populists...... 10 11. The Optimistic Scenario: the Crisis as a Chance for Reform...... 11 12. The Ugly Scenario: the Crisis as Regression into Morass...... 11 2 Bulgaria and the Global Crisis

1. The Pre-Crisis Situation: Stable Macro- In the last quarter of 2008, though, the Economy and Dynamic Development effects of the global financial and economic crisis could already be felt in Bulgaria as After the last economic crisis of 1996-97 well. Growth went down to 6.8% in the in Bulgaria when hyperinflation topped third quarter, only to drop sharply to a mod- 1000%, the successive Bulgarian govern- est 3.6% in the last quarter of the year. As ments managed to stabilize the macro- a result, the average annual growth did not economic framework. The Currency Board, exceed a mere 6%, staying below the of- which was introduced in 1997, pegged the ficially planned 6.4% (already downsized by New Bulgarian BGN (BGN) to the German the Government from previous 6.7%). More Mark (DM) in a 1:1 ratio and thus secured than half (55%) of the growth is generated the monetary stability of the country. The by three sectors – real estate, construction obligation to spend only what had been and financial services. generated before stimulated a prudent It is to be expected that Bulgaria’s eco- and restrictive fiscal policy which gradually nomic growth will slow down significantly managed to achieve a balanced budget, under the impact of the global financial to bring down external foreign debt, to and economic crisis. This is an imported build solid foreign-currency reserves and effect of the recession in Bulgaria’s major even accumulate budget surpluses in re- trade and investment partners. The initial cent years. The currency board still remains forecast of the Bulgarian National Bank of the guarantor of stability and the BGN is late 2008 was for 4.4% growth, the na- now pegged to the Euro, with 1 Euro at tional budget adopted in December 2008 1.95583 BGN. was based on 4.7%, while now the grim- Bulgaria with its high economic dyna- mest scenarios of the National Bank are mism and financial stability is in a good po- between 1.2% and 1.5%. The Finance sition to counter the global crisis. In Sep- Ministry’s forecast in December was 2.1%. tember 2008 the budget surplus amounted The latest IMF estimates for 2009 indicate to 5 billion BGN or 7.5% of estimated GDP. that growth will go down to 2% and infla- By the end of the year fiscal reserves were tion will be around 4.5%1. In late January, 13 billion BGN or 20% of GDP, domestic the European Bank for Reconstruction and currency reserves – almost 30 billion BGN Development (EBRD) lowered its estimates or 45% of estimated GDP, sovereign debt about growth in the Balkan countries. – 10, 5 billion BGN or 15% of GDP. In De- Southeast Europe is expected to grow at cember 2008 the foreign direct investments 1.9%, 1.5% less than predicted last No- (FDI) amounted to 3.7 billion Euro or 11% vember. The EBRD, likewise, estimates Bul- of GDP and were already less than the 4.7 garia’s growth at 2%. billion Euro (16.3%) of the preceding year. In December 2008 industrial output still There has been a positive development increased by 1.7% as compared to the pre- in the manufacturing industry where FDI vious month but it dropped significantly by marked a five-fold increase from 3.4% to 8.3% compared to the previous year, the 16.3% of the overall amount. average growth thus staying at 4% annu- Bulgaria consistently maintained high ally. The manufacturing industry shrunk by growth rates in the past seven years. In the first 10%, while mining was hit even worse with half of 2008 growth was still at 7.1%, stimulat- a 25% decrease and metal mining plung- ed among other factors by the 10% “flat” tax ing deeply by minus 65%. The present on corporate and personal incomes. The high growth of recent years was also due to the flex- ible, almost generous credit policy of the banks. 1 Ref. http://www.euromonitor.com/The_global_financial_cri- sis_Eastern_Europe_and_CIS_hit_hard Bulgaria and the Global Crisis 3 motor of growth is agriculture, with an in- Euro (Italy has 6.4 billion Euro through crease of 23% compared to 2007. UniCredit and Austria has 4.5 billion Euro The weak spot in Bulgaria’s economic in- through Raiffeisen). This amount, though, dices is definitely the current account deficit is a lot less than the 162 billion Euro in the which grew from 6.3 billion BGN in 2007 Czech Republic, the 121 billion Euro in Hun- up to 8.3 billion BGN in 2008, representing gary, the 227 billion Euro in Poland or even 24.3% of GDP. Until now, the deficit was the 98 billion Euro in Romania. Even in an financed by money transfers of Bulgarians “ugly risk scenario”, the banks do not ex- living abroad, FDI and credits. But the credit pect losses exceeding 20%. crisis will make its financing harder. In 2008 At the moment Bulgarians are not worried FDI dropped considerably and could cover about their money and there are no lines of only 68% of the current deficit (compared people in front of the banks. This may also be to as much as 129% back in 2007!). due to the fact that the government recently Exports, which were still booming in the raised the level of state guarantee on deposits first nine months of 2008, fell by 6.8% in from 40.000 to 100.000 BGN. the last quarter and marked an annual in- The obligatory minimum reserve of bank crease of only 2.8%, while imports went up deposits was reduced from 12% to 10%. by 4.8%. With 65% of Bulgaria’s exports At present the government is checking the destined for the EU, recession in European option of an inter-bank deposit guarantee countries like Germany is bound to pervade scheme which, if introduced, would give the Bulgaria as well. On the other hand, the fall- banks additional security. ing prices of oil and food products also ex- The Ministry of Finance will soon issue ert pressure on the economy. And if it were state obligations of 3, 5 and 10-years matu- not for the “grey” sector of the economy rity with a total nominal value of 750 BGN, which, according to experts, in good years plus short-term bonds for a total of 50 million added 2-3% on to the official growth rate, BGN. The goal is long-term stability of interest the economic collapse would have been rates which is one of the Maastricht criteria even more dramatic. for joining the Euro-zone. Experts sustain that industrial and com- 2. No Crisis in the Financial Sector mercial banking may be declining but by no more than 5%. The leasing market will be The global financial crisis has no direct im- the first to contract either because credits pact on the balance sheets of Bulgarian will be unavailable or because of growing banks. Their crediting activity is mostly tar- interest rates. Credits will become more ex- geted to the Bulgarian economy and banks pensive and companies will find it harder to remained uninvolved in speculations with finance current spending, let alone invest- American financial instruments. Yet, there ment. This shortage will also embrace the are reasons to be worried because over non-banking financial sector which slowed 90% of the Bulgarian banks are foreign- down by 5.6% in the third quarter of 2008. owned. The five major banks are the Ital- Insurance companies however, remain in a ian UniCredit, the Austrian Raiffeisen Bank, good position because all creditors in Bul- DSK which has a Hungarian “mother”, and garia want to secure their credits. But they UBB and Pireus Euro-Bank which are sub- will be more prudent and will weigh their sidiaries of Greek banks. If the “parent” risks more cautiously. banks are ailing, there is a risk for credits in Many experts had feared that inflation Bulgaria to dry up. would grow in Bulgaria but the opposite West European banks in Bulgaria have happened – the falling prices of raw ma- credit claims of approximately 32 billion terials brought down inflation to 10% as 4 Bulgaria and the Global Crisis

early as in 2008. Inflation will continue to its for a flat, a car or commodities. And if decline but since there is no likelihood of they become unable to service their credits salary cuts, Bulgaria does not seem to be in because of unemployment or lower income, danger of deflation. income conditions will turn worse and fear will grow. Half of the households spend 3. The Currency Board as a Factor of Stability 25% of their income on servicing a loan and half of them struggle regularly or from Will the Currency Board survive the crisis?2 time to time with the payments. There is a universal argument that at time The population has high confidence in of crisis currencies should be devaluated in the Currency Board, memories of the hyper- order to enhance the competitiveness of inflation of 1996/97 are still alive and there exports. Thus a number of East European is still a lingering fear of falling into poverty countries lately devaluated their currencies: and deprivation. Thus both political lead- the Serb Dinar fell by 23%, the Turkish Lira ers and the Central Bank want to maintain by 27%, the Hungarian Forint by 31%, the the Currency Board and the fixed exchange Romanian Lea by 39%, the Polish Zloti by rate. Also the IMF is in support of this be- 44%, etc. With all neighbouring currencies cause in troubled times it becomes all the falling like dominos, the logical question more important to keep up the confidence arises: for how much longer will the Bulgar- in the currency regime and in the financial ian Lev remain as strong as a “lion” (= lev)? system. In other words, the Currency Board It should be noted that because of pegging will stay. It is well structured and stable the BGN to the Euro Bulgaria indeed loses enough to survive rough blows. some competitiveness in the race among The alternative idea to introduce the euro the neighbours to attract foreign clients. At earlier than originally planned for in 2012 is least theoretically speaking, but practically off the table following the EU summit on the so far no visible benefit has been noticed crisis held on March 1 in Prague. The “old” in the neighbouring countries after they member states do not want to hear about it. had devaluated their currencies. The col- An early entry into the Euro zone looks much lapse of external demand is so dramatic in less likely now than it did before the crisis. some sectors that devaluation simply does not work. On the contrary, disbanding the 4. A Weakening Real Economy Currency Board and subsequently devaluat- ing the BGN would have an abrupt boomer- The alarm bells of crisis are heard not so ang effect on the huge private debt which much in the Bulgarian financial sector it- amounted to 88% of GDP in 2008, credits self, with regards to banking or the cur- which are mostly denominated in Euro, but rency. It is rather the “real” sector of the paid in BGN. The Bulgarian Industrial Asso- economy that feels the contraction of fi- ciation already warned that if the BGN is nancial flows most acutely and has been depreciated many companies will be unable sending out bad news lately. to pay their debts because of the increased Beginning in October 2008, the busi- cost. At the moment company debts amount ness climate index has been deteriorating to 160 billion BGN and is likely to reach 200 by the month having already gone down billion BGN in 2009. below its 10-year average. The indices of Over one-third of the Bulgarian house- construction, industry, retail and services holds have taken up bigger or smaller cred- have worsened the most. Surveys in February 2009 indicate that companies which believe to be facing hard- 2 Ref. http://crisistalk.worldbank.org/2009/02/will-the-currency-board-survive-in-bulgaria.html ship are three times more than those that Bulgaria and the Global Crisis 5 are not in difficulty; 31% of the companies In this way the financial crisis hit the new believe to have been affected by the crisis; oligarchs as well, the super rich Bulgarians, 20% report reduced sales; 19% report a re- the shady winners of transition. Vassil Bozhk- duced number of clients. A survey among ov, the richest Bulgarian and tycoon of gam- the members of the German-Bulgarian In- bling and construction, is estimated to have dustrial Chamber shows that almost all con- lost 60% of his wealth which is now estimat- sider themselves affected by the crisis, es- ed to “merely” around half a billion BGN. He pecially with regard to sales. While turnover is slightly ahead of Mitko Sabev who suffered did not suffer adverse effects in 2008, the a 20% loss in his oil business. The third one to estimate for 2009 is a 40% drop in sales. follow is energy tycoon Hristo Kovachki who The complaints are mostly related to the lost almost half of his wealth, now amounting deterioration of financial conditions, which to less than half a billion BGN. prompt companies to cut or cancel expendi- The structure of FDI for 2008 shows that tures. Yet, only a small number consider lay- almost half of it, i. e. about 2.4 billion euro, ing off personnel! Investment plans are ei- went to real estate. In the last few months this ther reduced or completely abandoned. No sector suffered a dramatic collapse, the prices company pledges an increase in investment of homes in Sofia went down almost by half, and only 30% hope to deliver as planned. while the drop in the prices of office space The state is expected to extend guaran- is slightly less. It could be, though, that the tees to the banks, to support entire branches, crisis in this sector is only speeding up a proc- to increase public spending and especially to ess which was bound to happen anyway. The lower taxes. A clear majority expects lower ex- real estate bubble in Bulgaria was reaching its ports from Bulgaria to Germany and a lower maximum and a consolidation was long over- level of German investments in Bulgaria. due. The crisis will let off some air from the Bozhidar Danev, Chairman of the Bulgar- bubble before it is blown out of proportion ian Industrial Association, predicts an im- and explodes with a much bigger bang. pending severe economic crisis in Bulgaria, The trade sector as well is feeling the li- especially with regard to the companies’ quidity shortage, car sales went down by credit obligations which will not be paid off 70%, many car dealers risk insolvency in the because of the limitations in the availability coming months. The prices of Mercedes are of new credits. In his view, inter-company down by 20-30%, while used cars sell for less and inter-bank indebtedness in the private than half their price. The trend in Bulgaria is sector is a very serious issue. In the absence changing towards smaller cars too. of liquidity, the companies have no resources Additionally, the gas crisis of last January to pay their mutual obligations and this will caused by the Russian-Ukrainian dispute cost affect their productivity. He expects bank- local enterprises around 150 billion Euro. ruptcies especially among small and medium The economic crisis heavily affected Bul- enterprises (SME) soon. garia’s exports. According to data of the Na- The companies with the highest debts are tional Institute of Statistics, foreign orders for those in the sectors real estate, construction exports were down by 4.7% in January and and trade. The situation of companies which production fell by 11%. are listed on the stock exchange is also very serious because they incur additional losses 5. Slight Fluctuations on the Labour Market due to the falling prices of their stocks. Also in Bulgaria the stock exchange has collapsed. As a result of the economic boom of the last From October 2007 through October 2008 years and the massive labour migration to the index of the Sofia Stock Exchange SOFIX the EU, the US, Canada, South Africa and went down by 70%. other countries, Bulgaria maintained a rela- 6 Bulgaria and the Global Crisis

tively low level of unemployment of 6.3%. Burgas unemployment is rising, while in Sofia Sometimes even acute shortages, particu- nothing has changed so far. Unemployment larly of qualified labour, could be felt mainly in the capital stays at 4% and is thus still in in Sofia and the bigger cities. the “full employment” range. The above mentioned surveys of early Another factor could be the “return- 2009 indicate that 72% of employers do ees”, Bulgarians labour migrants, affected not expect major lay offs as a consequence by the crisis in the EU, the US and other of the economic crisis. With respect to their countries that now have to consider com- own company, a total of 55% of respond- ing back to Bulgaria to earn their living ents do not expect discharge of workers here. This is an opportunity for the nation- and employees. It is surprising that in spite al job market because many of the return- of the crisis many employers (40%) are ing Bulgarians are expected to be highly even planning new recruitments. They are qualified and will provide expertise that happy to find a better choice on the job has been unavailable so far. market, which used to be rather depleted Many enterprises will look at redundancy until recently. In view of the crisis, how- only as a last resort because they want to ever, most firms will hire only on a provi- keep their qualified staff. Many of them may sional basis and for a specific project. This just send their workers on unpaid leave and corresponds with 68% of those looking for survive the crisis in a “week in, week out” jobs at the moment. Both employers and rhythm, without discharging workers. This is employees expect wages to grow or stay the “grey” option of part-time work. the same, but not to go down. But yes, there are dismissals and unem- 6. Bulgaria in International Comparison ployment is growing. The government estimates that unemployment will grow from Bulgaria has been repeatedly compared to 6.3% at the end of 2008 to 7.4% during the other countries and their problems in the year. Others estimate 10% to be a more re- crisis but it does not fall into any cliché. alistic figure. In February it already stood at Why is Bulgaria not Iceland? Because its 6.7%. According to surveys, the first 12.000 banking sector is small and of high quality, jobs were lost as a result of the crisis as early its volume almost equals the country’s GDP as in the last four months of 2008, mostly and is not ten-fold bigger, as is the case in affecting the manufacturing industry. The Iceland. Bulgarian banks are well capitalized trade-unions foresee more waves of dismiss- and not heavily leveraged; they do not suf- als in mining, chemical industry, machine- fer losses from American sub-prime loans. In building, and especially in the textile industry. addition, it is highly unlikely for the Bulgar- Tourism will most likely be hit hard as well ian state to intervene in the banking sector and large-scale losses of seasonal jobs are ex- since most of the banks are subsidiaries of pected. Even banks are discharging staff and foreign banks. The currency risk is reduced 1.000-1.500 out of a total of 25.000 employ- by the Currency Board which has been in ees have already been laid off. place for 11 years now. Iceland is just con- Nevertheless, even in the trade-unions’ sidering introducing one! Why can Bulgaria view this will not lead to a dramatic growth not be compared to Hungary, Argentine in unemployment because the initial acute or Romania either? Unlike these countries, shortage of qualified personnel makes it eas- Bulgaria is not burdened by overwhelming ier for the newly discharged ones to find a public debts, nor threatened by a weak cur- new job right away. The more visible fluctua- rency. In August the budget surplus was tions on the job market are mainly the result 7.5% of estimated GDP, which made Bul- of regional factors. In the cities of Varna and garia unique in the entire European Union! Bulgaria and the Global Crisis 7

Romania has never had surpluses, on the Commission and the IMF. The objective is to contrary – it has almost reached a 7% defi- keep spending (except for EU contributions) cit. The nominal debt is just 15% of GDP, under 40% of GDP and generate a surplus of and the net one is almost zero. 3%. The mid-term targets as defined in the Various scenarios are circulating regarding 2007-2010 Convergence Programme shall possible implications of the crisis, its duration, be observed. The adopted budget for 2009 how strongly it may affect Bulgaria and what is based on the assumptions of 4.7% growth, consequences this might have for the coun- 5.3 billion FDI and 5.4% inflation4. try’s future development be. If the crisis is over The Government will increase capital by the third quarter of 2009, the situation in spending by 5.6 billion BGN destined to all Bulgaria would not be too bad. If, however, it sectors of the economy in reaction to con- is to last longer and make its way into 2010, tracting markets and the receding demand. the situation will be more difficult. The effect Another 700 million BGN are earmarked as of the crisis is likely to reach Bulgaria with a additional reserve. At a conference of the Frie- delay of 3 to 6 months. drich Ebert Foundation in Sofia on the effect On 27 February Standard & Poors down- of the crisis in Bulgaria, Bulgarian Minister of graded Bulgaria from level 7 to level 6, to a Economy, Petar Dimitrov already hinted at the country of “increased economic risk”, bring- possibility of cutting the budget surplus, if ing it thus to the level of Romania. Standard & necessary, down to 1%5. Poors also expect that the financial profiles of The budget 2009 includes 3 stimulus pack- Bulgarian banks will suffer growing pressure. ages in support of the economy and invest- On October 30 they had already lowered Bul- ments. The guiding principle in determining garia’s rating from “bbb/a3” to “bbb-plus/ the priorities of these investment programmes a2”. Its long-term debt ratings are now the will be the support for local economic activi- same as those of Croatia and Latvia. ties. The economic packages comprise of: a) In spite of all pessimistic forecasts, economic activities, b) flexibility of the market though, the situation now is not as dire as and c) flexibility of the social network. suggested. The peak of the crisis is expected • The Bulgarian Development Bank shall set in May-June and only then one may predict up a credit facility of 500 million BGN for any future developments. small and medium enterprises, of which 100 million will be earmarked for farm- 7. The Economic Programme ers. Additional measures in support of the of Government local economy include improving public services, simplifying regulations and re- In December, Finance Minister Plamen Ore- ducing bureaucracy, as well as introducing sharski submitted to parliament the objectives shorter periods for VAT reimbursement of the 2009 budget.3 The government will en- and last but not least the construction of sure a favourable economic environment but 20 industrial parks. will not intervene directly in the real sector. • The Ministry of Education will initiate an The budget provides for measures to stimu- investment programme worth 100 mil- late the economy and step up investment ac- lion BGN for the renovation of students’ tivities, as well as for “cushions” to ease the hostels and of 150 to 200 schools, playing possible effect of the financial and economic grounds, etc. crisis in the real sector. The budget pursues an • The Ministry of Labour and Social Policies anti-cyclic fiscal policy, which is in compliance intends to create 58.000 new jobs for un- with the recommendations of the European

4 Ref. http://www.econ.bg/content/Budget%202009.doc 3 Ref. http://www.minfin.bg/en/news/3049 5 Ref.: http://www.fes.bg/?cid=52&NewsId=649 8 Bulgaria and the Global Crisis

qualified labour and shall launch qualifica- been rescheduled from 2010 to 2009. The tion programmes for 16.000 persons. President of the European Commission Jose • The Ministry of Health plans to invest 3 Manuel Barroso declared that Bulgaria will billion BGN in the health sector, mainly in receive 528 million Euro in the form of ad- the renovation of regional and national vance payments from the cohesion funds; health centres, and for medical equip- under a separate plan for urgent energy ment; 41 projects are being planned. projects Bulgaria will receive 40 million Euro • The Ministry of Transport shall launch 33 for a gas pipeline with Greece and 10 mil- projects for a total of 520 million BGN; lion Euro for linking up with the Romanian 195 million BGN of which shall come network. As of now, no new agreement from public funds and the remainder from with the IMF is considered. EU and ISPA funds under the operative programme on transport; among other 8. The Neo-Liberal Mantra projects these shall include the moderni- zation of the Plovdiv Airport, the refur- There are experts like Georgi Angelov from bishing of trains and wagons, as well as the Open Society Institute (OSI) in Sofia the purchase of new ones, a modern in- who advise the government to further limit ter-modal container terminal in Sofia, etc. government spending because the global • The Ministry of the Environment has recession would have a negative impact on already approved 2 billion BGN for public revenue. Lachezar Bogdanov from projects under the operative pro- Industry Watch recommends that govern- gramme on the environment; priority ment should downscale support for unprof- is the construction of water infrastruc- itable state companies like the Bulgarian ture, the restoration of existing and the state railways, the postal service or the cen- construction of new water-supply sys- tral-heating companies and cover eventual tems, as well as building installations financial losses by selling public property for sewage and waste management. or through further privatization measures. • Workers in the industrial and service Georgi Danev from the Center for Liberal sectors who have been put on part- Strategies, who is very critical of the gov- time due to the crisis shall be entitled ernment’s plan to increase spending, like- to a monthly compensation of 120 BGN wise sustains that from his point of view it under a new programme for labour would be better for the government to re- market flexibility. The national employ- duce its public investment. ment plan of action for 2009 set aside An interesting idea has come from 6.75 million BGN for these compensa- Georgi Angelov from OSI and Simeon Dy- tions. Almost 19.000 workers will take ankov, an economist in the World Bank.6 advantage of this programme. They suggested a 7.5% decrease of payroll The government programme has re- taxes from the current 31.3% to 23.8%. ceived support from various institutions. According to their estimate, this measure The European Investment Bank has offered would bring about 130.000 newly cre- Bulgarian commercial banks 200 million ated or preserved jobs, a 0.5% increase Euro under the programme on competitive- of growth and would only cost 0.52% of ness. Talks are under way with the European GDP. Such a reform would have three ad- Commission for over 209 million Euro for vantages: a) it will not be liable to corrup- energy efficiency programmes. The money tion, b) it offers direct incentive to every- will come from EBRD, under the Interna- tional Kozlodui Fund. 45 million euro from the programme on competitiveness have 6 Ref. http://osi.bg/?cy=16&lang=2 Bulgaria and the Global Crisis 9 body in the formal economy, and b) it is is marked by corruption. Local “business- easy to implement and has an immediate men” secure tenders through influence effect. This is theoretically correct, but it in state institutions and political parties. can only lead to the described outcome if Ahmed Dogan, leader of the Movement employers and employees would declare for Rights and Freedoms (MRF), publicly income and thus pay social security in full. stated that there was nothing wrong with Regrettably, precisely in this instance the the so-called “ring of businesses” which reality is “grey” – frequently only minimum support his party and get public contracts salaries are reported and social security is in exchange. In a symptomatic way, Dog- paid only on these. In reality, a reduction in an represents the amalgamation between payroll taxes would apply only to minimum economic and political interests, and the wage levels and would most probably not far too obvious attitude towards it, shared have the envisaged effect. by a large number of Bulgarian politicians. The economists from the Institute for Some 30 oligarchs and their clans con- Market Economics (IME)7, on the other trol the entire economic and political life hand, warn against a “political economy” of Bulgaria. In Bulgaria this may not be as of government programmes ahead of elec- simple as it is in Russia because the domes- tions spending and emphasize that this will tic market cannot be fully isolated from not necessarily bring success, as evidenced foreign companies. However, on local level by the elections in 2005 when the gov- the oligarchs are very powerful. Groups of ernment of Simeon Saxe-Coburg-Gotha 2-5 individuals or families often control not considerably increased government spend- just local authorities but also representa- ing before the elections and yet was not tives of central government, police, revenue re-elected. IME sees the Bulgarian govern- authorities, courts and prosecution. Public ment alarmingly close to the camp of the tenders and concessions are the main chan- new American President Barak Obama, nels of corruption. Legal prosecution of cor- whose economic programme they seem to ruption is very low and 80% of the inves- reject as well. Their neo-liberal mantra re- tigated suspicions never lead to an indict- mains “lower taxes, less government” and ment. In the period 2005-2008 the number they keep referring to the “Wall Street In- of charges went down by more than 30%, dex for Economic Freedom” where Bulgaria which, however, does not mean any lesser is rated only as “moderately free”. number of offences! Against this background, it is easy to un- 9. Crisis and Corruption: derstand the warning signals coming from Mutually Amplifying Scourges observers and experts when looking at the government’s plans. The global crisis may lead The “Corruption Index 2008” of Transpar- to a further boom in the Bulgarian “corrup- ency International puts Bulgaria last, be- tion industry”. When foreign investment is hind all other EU member states. The lat- going down and the money flow from abroad est report of the Center for the Study of is drying up, and when public spending and Democracy (CSD) titled “Crime Without public tenders will increase as a counter- Punishment”8 shows the extent to which measure, “corruption pressure” in the public corruption is intertwined with politics and institutions will grow stronger. And on top of how deeply the entire Bulgarian economy all, billions of Euro from the EU funds need to be spent in a relatively short time! This is a win-win situation for the cor- ruptive networks in politics and in the 7 For more information Ref. http://ime.bg/en/ economy. A politician increases his popu- 8 Ref. http://www.csd.bg/fileSrc.php?id=2650 10 Bulgaria and the Global Crisis

larity because he can distribute favours, his site “Frog.bg”, an “emigrant” was openly business partner wins lucrative contracts calling for a military regime which should and is in turn generous to the politician “clean up the mess”. and his party. What share, though, of these People’s fear of losses they may incur in funds will really end up in construction, in- the crisis combined with the still strong re- vestment, equipment and ultimately create flex of the former socialist countries to call jobs and a better livelihood for the people on the state will enhance chances of those remains a big question. Apart from that, politicians who promise protection and im- every politician or entrepreneur who is not mediate action, i.e. an active state policy. a part of the network most likely will stay In the world presently the tide goes against empty-handed. the pure neo-liberal doctrine and in favour In short, the crisis may lead to bigger of stronger state control and responsibility. corruption in Bulgaria, certainly a most un- This is a potentially strong card for left or desirable effect. Millions from the econom- pro-state socially-minded parties, while it ic programme of the government or from puts on the defensive the proponents of a the EU funds might be, in part at least, pure market doctrine. Bulgarian conserva- diverted and thus be lost for the main ob- tive right-wing parties evidently belong jective – overcoming the crisis. Economic to the latter category. The IME laid down programmes will not help alone. What is economic policy guide-lines for them, in- needed in addition are effective and real cluding for the GERB Party (Movement for structural reforms, simpler and more trans- European Bulgaria) led by the Sofia mayor parent calls for tenders, abridged decision- Boiko Borissov who leads in all opinion polls making in project selection procedures, a for the forthcoming elections. Interestingly functioning judiciary, etc. These are exactly enough, he recently hinted that some parts the same issues, which are constantly raised of the economic programme of the govern- by the European Commission in its reports ment are not bad at all and announced that and to which it demands quick solutions. he may include some similar points in his The government, however, still fails to show election platform. significant progress in this regard. “Crime On its small political stage, Bulgaria res- without punishment” still pays well! onates the most important question in Eu- rope now regarding the future of the project 10. Crisis and Elections: of a common European house, namely the Fertile Soil for Populists swing of the economic policy pendulum away from a large and free economic space Bulgarians will vote twice this summer: first, towards (or back to) a tendency favouring a on June 7th they will elect their members of protectionist national welfare state. In Bul- the European Parliament, and shortly after garia, too, there is a danger that short-term the National Assembly. electoral tactics will remove fundamental Public trust in state institutions is questions of economic efficiency from the alarmingly low. In December the approv- agenda in favour of preferences for more al of the government was at 10%, of the statehood and protectionism. parliament at 7%, of the courts at 12% But not only markets can fail – govern- and of the prosecution at 14%. The fear of ments can too. And one can only hope that the economic crisis and the mistrust in politi- fear and anger of the citizenry will not catapult cians may bring old, subliminal tensions to some populists into power. Volen Siderov and the fore and provoke an abrupt change in his nationalist, xenophobic, euro-sceptic party public perceptions. Only very recently, on Ataka are already sensing a fair wind. the rather polemic and scandalous web- Bulgaria and the Global Crisis 11

11. The Optimistic Scenario: The cynical answer of Bulgaria’s corrupt the Crisis as a Chance for Reform elites may well be: “Fine, then let’s continue the party at home!” Right now, at the time The crisis offers opportunities as well: where of crisis they are moving together, closing everybody runs away, others see their chance. their own circles and sharing the loot among Local investors will play a bigger role when themselves. All efforts to hold fair and free foreign investors disappear. Even when con- elections in the coming months risk to be ditions are more difficult, a well developed thwarted by their resistance. Moreover, the project always has a chance of realization. The apprehensions that “vote buying” or “vote exceedingly high profit rates in the past few pressure” will become a common feature in years offer the possibility for scaling down the these elections may come true. margins. Expectations need to be reassessed And then, in the worst case, the victorious because Bulgaria is still underdeveloped and political and economic mafiosi - of all parties has great potentials for growth. - will join forces after the elections and lead Another potentially positive side-effect of Bulgaria regressing ever more deeply into the the crisis may be that some investors will de- morass of corruption. cide more cautiously and might want to avoid Reality will probably find the middle way the risks of distant new markets and rather between these two scenarios. The extent to invest closer to home, preferably in the EU. which the world financial and economic crisis And in this respect especially Bulgaria and Ro- will impact Bulgaria will, in turn, determine mania have many advantages. Indeed some whether and how significantly certain social big companies such as Siemens have already and political parameters will be affected. The announced that they intend to expand their chance is still there. operations in Bulgaria. Others see the crisis as an opportunity to mobilise strong pressure to enforce structural reforms, to ensure a transparent and ef- ficient absorption of EU funds, to create new “green collar” jobs and to turn Bulgaria into a power-house of innovation. Many civil society organizations and other non-state ac- tors are mobilizing their supporters to take the global crisis as an argument in the forthcoming elections and demand new policies and new politicians - in all parties.

12. The Ugly Scenario: the Crisis as Regression into Morass

At the 10th Economic Forum on South-Eastern Europe in Sofia on November 5, 2008 Steve Hanke, Professor at John Hopkins in Balti- more, US and ”father” of the Bulgarian Cur- rency Board, stated apodictically: “The party is over” and explained that what we have seen so far will not be repeated again. He was, of course, referring to the big international “party” of the finance jugglers. 12 Bulgaria and the Global Crisis

About the author Marc Meinardus studied economic and social sciences at the University of Erlangen-Nurem- berg and received his doctoral degree from the Free University of Berlin. He has been working for the Friedrich Ebert Foundation since 1990. In 1995-98 he started and built up the FES Re- gional Office for the Balkans as its first director. In January 2008 he returned as country repre- sentative of the foundation in Bulgaria. Bulgaria with its high economic dynamism and financial stability is in a good position to counter the global crisis. Over the past seven years it succeeded in registering high growth rates, in attracting foreign investors and capital and in bringing down unemployment. Thanks to a prudent fiscal policy, it managed to build solid reserves and even to generate budget surpluses in recent years. The Currency Board has been and will remain the guarantor of stability.

The extent to which the global financial and economic crisis will impact in Bulgaria will also determine how substantially this might affect social and political parameters.

March 2009